Almost a third of hedge funds will disappear due to closure or mergers after the $1.5 trillion industry posted its worst ever performance this year, said IGS Group, which advises hedge funds on raising money, according to Bloomberg.

“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS chief executive officer John Godden told the news service. “It’s going to be a 30 per cent wipe out," he said.

The number of hedge funds more than tripled in the last decade to a record 10,233 at the end of June, according to Chicago-based Hedge Fund Research.

Meanwhile, data from Credit Suisse/Tremont confirmed that November was a poor month for the hedge fund sector. Its main index dropped by 4.15 per cent in November from October, equating to a drop of 19.04 per cent for the first 11 months of 2008. Equity market neutral funds plunged by more than 40 per cent in November, CS/Tremont said.

The equity market neutral sub-sector of hedge funds was hit by the problems of Kingate Global/Fairfield Sentry hedge fund businesses, which have been reportedly hit by the $50 billion Bernard Madoff alleged fraud in the US.

In his interview, Mr Godden said funds of hedge funds, in particular, are likely to combine. There are roughly three funds-of-funds for every single hedge fund, up from one to seven in 2001, according HFR.

“And even one to seven was too many,” said Mr Godden. “It’s a very, very crowded space with way too much overlap. The only thing that would threaten it was a change to the economic environment, which is what we’ve got.”